Wednesday, January 25, 2012

In my November 6, 2011 column - Roll Up Times Two? Sprouts Farmers Market In Talks With Sunflower Farmers Market About Possible Acquisition - I reported that representatives of Arizona-based Sprouts Farmers Market and Colorado-headquartered Sunflower Farmers Market were engaged in negotiations regarding either an outright acquisition of Sunflower by Sprouts' or a merger-type acquisition of Sunflower Farmers Market into Sprouts Farmers Market, with Sprouts' and its majority-owner private equity firm Apollo Global Management absorbing Sunflower into Sprouts' corporate structure and operations, like it did with the Henry's Farmers Market deal last year.

Today I can report that, according to my sources, Sprouts Farmers Market and Sunflower Farmers Market have reached an agreement in principle for such an acquisition-merger, which they currently plan to announce no later than two weeks from today, assuming some additional details and specifics can be worked out between the two farmers market-style grocery chains.

My sources tell me representatives of both grocery chains have signed a memo of understanding or letter of intent to merge the two food retailing companies, with Sprouts Farmers Market in the lead role, and that those additional details and specifics are currently being negotiated on by the two chains.

Neither Sprouts Farmers Market or Sunflower Farmers Market has publicly announced they've been engaged in deal talks, nor have they confirmed or denied my November 2011 report. Additionally, based on my research using the major Internet search engines, no other publications besides Fresh & Easy Buzz have reported on the deal talks to date.

The retailer closed three stores - Rollingwood, Sunset Valley and Anderson Lane - in Austin, Texas, in December 2011. The store closings were the result of having too many units too close to each other in Austin, following the Henry's Farmers Market merger last year. Henry's had some Sun Harvest banner stores in Austin which were nearby existing Sprouts locations, resulting in the duplication issue. No other Henry's or Sun Harvest banner stores have been closed to date.

The Sunflower format, as was the Henry's Farmers Market format, is virtually identical to Sprouts Farmers Market's format.

Based on information given Fresh & Easy Buzz by the chain late last year, along with my analysis of added sales from new stores open since then, I estimate that Sprouts Farmers Market currently has annualized sales in the $1.2 billion-to-$1.4 billion range.

Additionally, based on conversations with sources at Sunflower Farmers Market, I estimate the chain's current annual sales to be in the $600 million-to-$700 million range.

Neither grocery chain is publicly-held. Therefore Sprouts and Sunflower don't released annual sales publicly as a matter of record. However, senior executives of both chain's publicly mentioned annual sales numbers in interviews last year. I expect a mention of those metrics to be made again as part of any deal announcement.

Both Sprouts Farmers Market and Sunflower are expanding rapidly, focusing in large part on the same Western U.S. States.

For example, both farmers market-style grocery chains are putting a major new store opening emphasis in Northern California for 2012, where each plans to open numerous new stores this year.

Sprouts and Sunflower both also plan to open new stores (one each respectively) in Phoenix, Arizona this year, along with in Colorado.

Sunflower Farmers Market though, unlike Sprouts, has a wider geographical reach with its growth strategy, currently operating in eight states, compared to Sprouts Farmers Market's presence in four states, which are California, Arizona, Colorado and Texas.

For example, in 2011 Sunflower Farmers Market expanded into Northern California and Oklahoma, where it plans to open at least one new store this year, which will be its second unit in the state.

Sunflower currently has two units in California, in Roseville near Sacramento and in Modesto, which is in the Northern Central Valley. It currently has plans to open four new stores in Northern California this year.

Sunflower Farmers Market has no current plans to open stores in Southern California, which is where Sprouts has the highest number of stores out of its total store base.

Sprouts Farmers market currently plans to open at least three stores in Northern California this year.

A deal with Sunflower Farmers Market (a combined Sprouts Farmers Market and Sunflower) will give Sprouts' an immediate presence in four additional states - Nevada, Utah, New Mexico and Oklahoma. All four of these states fit well geographically with where Sprouts Farmers already is geographically.

Additionally, Sunflower's growth focus in Northern California, which mirrors that of Sprouts Farmers Market - and the fact it has no stores in Southern California (no duplication) - is also synergistic in terms of a combined Sprouts' and Sunflower, as is the fact the two grocery chains operate stores of the same farmers market-style of which are virtually identical to the Henry's Farmers Market chain. Sprouts' has now changed all the Henry's and Sun Harvest stores to the Sprouts Farmers Market banner.

To put is directly, a year ago there were three farmers market-style grocery chains in the U.S. - Henry's, Sprouts and Sunflower - all operating in the same Western U.S. states. Today there are just two - Sprouts (with the combined Henry's) and Sunflower Farmers Market. If all goes according to plan, there soon will be just one such chain, Sprouts Farmers Market (the combined Sprouts, Henry's and Sunflower), otherwise know as the house the Boney family built.

In a series of follow-up columns - and in various news storiespublished in January and February 2011 in Fresh & Easy Buzz, we further reported and developed the story, adding new information about the deal talks between private equity firm Apollo Global Management, which owned Henry's through its Southern California-based Smart & Final LLC retail company and is now the majority-owner of Sprouts Farmers Market.

On February 15, 2011 Apollo Global Management announced through Smart & Final that it would merge its Henry's Farmers Market chain with Sprouts, in a deal that would give Apollo majority ownership of Arizona-based Sprouts Farmers Market (the combined Sprouts and Henry's chains), with Henry's being absorbed into Sprouts' existing corporate structure and operations.

The Devil is always in the details, as I carefully noted at the top of this column. But, according to my sources, where things stand today, what I've called the (farmers market-style food and grocery retailing format) "Roll Up Times Two" (Henry's being the first one) is on the way, unless the Devil messes with those details.

Thursday, January 19, 2012

During an interview on the CNBC business network in November of last year famed investor Warren Buffett was asked if he saw any good long-term opportunities in European equities. His response: "If the price came down on some Tesco, I'd buy some more of that."

On Friday, the following day, Buffett increased his stake in Tesco from 3.21% to 5.08%, at a cost of about £500 million ($774 million), according to a required regulatory filing submitted to government authorities by his Berkshire Hathaway holding company, dated January 13, 2012.

Tesco is closing 12 Fresh & Easy stores, a story we broke on January 8 (read here) and January 9 (read here). A few hours after we published our January 9 follow-up report, Fresh & Easy Neighborhood Market's corporate spokesperson began calling and e-mailing editors and writers at various publications, ranging from the Financial Times and the Orange CountyRegister to supermarket industry trade publications, announcing the store closings.

Current plans call for Fresh & Easy Neighborhood Market to close the 12 stores by the end of this month to early February 2012.

Buffett's big buy is an important vote of confidence for Tesco following last week's big decline in its value. After all, when it comes to investing, he is regularly referred to as "The Oracle of Omaha."

Buffett, who also owns around $2.5 billion of Walmart Stores, Inc. stock, particularly likes Tesco's growth prospects in Asia, and most particularly the future growth opportunities afforded the global retailer in China, where CEO Philip Clarke is putting a major focus.

Prior to taking over as CEO from Terry Leahy in March 2011, Clarke was in charge of Tesco's Asian and European operations, along with heading up the retailer's corporate information technology efforts.

It is a stretch though to suggest Buffett's increased stake in Tesco is a specific vote of confidence for its money-losing Fresh & Easy chain in the U.S., however, because the legendary investor has as recently as late last year voiced serious concern over the enterprise.

It is fair to say though that Buffett is bullish enough on Tesco as a whole that he would increase his stake in the company by such a significant amount even though he harbors such concerns over the U.S. chain.

The "Sage of the Plains," another nickname for the man from Omaha, is a long-term value investor. So buying when he did, when Tesco was down by such a significant percentage last week, is classic Buffett. In other words, based on his proven research methods and track record, he knows a deal when he sees one. Buffett's seldom wrong.

But Tesco does face some big challenges, both at home an abroad.

It's competitors in the UK are getting much better and bigger, for example. And Tesco's focus on price-focused promotions, such as its recent 'Big Price Drop" promo, which is being called the "Big Price Flop" in the UK, aren't working so far.

Globally Tesco is focused on breaking even with Fresh & Easy by the end of its 2012/13 fiscal year, which ends in February 2013. It's not going to literally break even by then, in our analysis. And even if it does somehow achieve that objective by closing stores and cutting costs it must figure out a strategy to make its Fresh & Easy chain not only less of a financial drain but also a real contributor and asset to group Tesco.

But for now, in terms of Buffett's vote of confidence in Tesco, "Every Little Helps."

[Illustration credit: The ink-on-paper illustration of Warren Buffett at the top, titled 'The Oracle of Omaha," is coutesy of artist Andrew Mitchell. You can learn more about his work at his site here.]

Wednesday, January 18, 2012

California here they come: The Fresh Market opened the store pictured above, at 421 North State of Franklin Road in Johnson City, Tennessee, on January 4, 2012. Yesterday the grocery chain opened a new store on the east coast, in Scarsdale, New York. Another new Fresh Market store opens next week, on January 25th, in Rockville, Maryland. Many more stores are set to open this year.

Since we published our story in August 2011, the fast-growing 112-store grocery chain has been focusing on achieving just that goal. And while it might come a bit later in the year than mid-2012, The Fresh Market plans to open its first one or two stores in Northern California's San Francisco Bay Area and metro-Sacramento region before the year is out, according to our sources.

One of the first Fresh Market stores to open - in addition to the Palo Alto store we reported on in the story linked above - could be in a vacant approximately 25,000 square-foot Borders Books store at Rocky Ridge Drive and Douglas Boulevard in Roseville, near Sacramento, a city that's seen a spate of new grocery store openings over the last couple years, including units opened by other recent entrants to the region, like Sprouts Farmers Market and Sunflower Farmers Market, both of which have additional new stores set to open this year in the Sacramento region and elsewhere in Northern California.

Publicly-held The Fresh Market, which has been turning in solid comparable-store-sales growth and profits over the last couple years, is also looking for additional store locations in Sacramento and the metro region, including Elk Grove and Folsom, where Tesco's Fresh & Easy plans to open stores in March of this year, along with in the San Francisco Bay Area.

Fresh & Easy Neighborhood Market opened two new stores in Northern California's Bay Area last week, on January 11, giving it 18 units in the northern part of the state. The two stores are in Brentwood in the East Bay and Mountain View, which is in Silicon Valley, in the South Bay region.

As we reported on August 3, 2011 [Fast-Growing Specialty Grocer The Fresh Market Targeting Mid-2012 For First California Store], The Fresh Market has been in negotiations with the developer of the Edgewood Plaza shopping center in Palo Alto, California to locate a store in a vacant building at 2800 Channing Avenue in the center. Those negotiations continue, and progress is being made toward a deal, according to our sources, who tell us they expect a lease to be signed by the developer and The Fresh Market in the first quarter of this year.

In addition to offering national, regional and local product brands in its stores, The Fresh Market has its own private brand items in the basic grocery, specialty and natural-organic categories. One of the private brand lines in the natural-organic category is TFM Live Leaner Cereal, which includes the Honey Almond Flax variety pictured above.

The Fresh Market is also looking to open a distribution facility in Northern California, according to our sources, particularly for distribution of its extensive fresh foods offerings, which include produce, fresh meats, deli and ready-to-eat and ready-to-heat fresh-prepared foods. The grocer likes to source locally and plans to take advantage of the fact that so much fresh produce and other fresh foods are grown and produced in Northern California.

Our sources tell us The Fresh Market - which isn't commenting on its specific plans in California at this point, although we expect an announcement about those plans from the grocery chain soon - wants to have its first couple stores open in Northern California by mid-to-late 2012, to be followed by additional store openings in 2013.

The fast-growing - it opened its newest store yesterday in Scarsdale, New York and one in Johnson City, Tennessee (pictured at top) January 4 - North Carolina-based specialty grocer is a serious player in its current markets, competing strongly against both Trader Joe's and Whole Foods Market, for example, in the fresh and specialty grocery niche.

The Fresh Market now plans to take its brand and style of food retailing (see our August 2011 story for details) to what is arguably the mecca of specialty grocery store competition, Northern California. And, based on what we've learned since August 2011, it plans to do so in a significant way - opening numerous stores in the Golden State over the next few years.

Tesco has (literally) just released (at 7 a.m in the UK) its Christmas and New Years trading statement for the six week period up to January 7, 2012.

In the just-issued statement Tesco reports strong comparable-store-sales (called like-for-like in the UK) of 19.3% for its El Segundo, California-based Fresh & Easy Neighborhood Market chain for the six week holiday period, compared to the same period last year.

Additionally, Tesco says total sales at Fresh & Easy grew by 40.6% (actual rate) for the period, over the previous year.

The 19.3% comparable-store-sales growth number is a strong one for Fresh & Easy.

It's also the most meaningful metric of the two noted above because it measures stores that have been open for at least one year. The total sales number includes new stores that have been opened during the year.

Overall, Tesco, which has operations in 14 countries, reported an increase in group sales in the six weeks to January 7, 2012 of 5.2% including petrol (4.2% at actual exchange rates) and by 4.0% excluding petrol (2.9% at actual exchange rates), compared to the same period last year.

In the United Kingdom, which accounts for nearly 70% of Tesco's annual revenue, the retailer had negative comparable-store-sales of (1.3%) for the seven weeks up to January 7, 2012, including value added tax and excluding fuel sales, compared to the same period last year.

The negative like-for-like sales for Tesco at home in the UK reflects strong competition from Walmart-owned Asda and Sainsbury's - the number two and three chains in the nation respectively after Tesco, which is number one - as well as from Morrisons and Waitrose, along with pressure being put on it from the deep-discount end by Aldi and Lidl, the German hard discount grocery chains that continue to expand in the UK.

Tesco launched a heavy discount program for the holidays called "The Big Price Drop," which, based on the sales growth numbers for the seven week period, doesn't appear to have been a sales booster for the retailer.

Tesco opened three new Fresh & Easy stores today - two in Northern California, in Mountain View and Brentwood in Northern California's San Francisco Bay Area - and a Fresh & Easy Express unit in the Southern California city of Hermosa Beach.

As we were the first publication of any kind to report on Sunday and early Monday, Tesco is closing 12 Fresh & Easy stores. The retailer plans to close the stores by the end of the month.

We will have more to say about Tesco's holiday sales report, particularly as it pertains to its Fresh 7 Easy chain in the U.S., upcoming. But the reporting is literally hot off the online press, so we wanted to give Fresh & Easy Buzz readers the first look.

You can view Tesco just-released holiday sales report here, which includes sales data for its divisions in Asia and Central Europe, along with some additional sales data overall.

Tesco's Fresh & Easy Neighborhood Market is set to open its second 'Express' format store - 3,000 square-feet of selling space, with an edited and limited assortment of the products it offers in its 10,000 square-foot grocery markets - at Pacific Coast Highway (PCH) and 8th Street in the coastal Southern California city of Hermosa Beach tomorrow morning.

The Christmas and New Year holidays have now come and gone and the Hermosa Beach Fresh & Easy Express store is set to be welcomed to the neighborhood tomorrow morning at 10 a.m, when the doors to the micro-small-format grocery market are opened.

The new neon sign on the front of the store is burning bright, as are the lights inside the store. The shelves are stocked but getting a touch up and facing, all in preparation for tomorrow's opening.

The Hermosa Beach, California fresh food and grocery market, which we've nicknamed the"Neon Fresh & Easy Express," will be the second 'Express' format store to be opened by the grocer.

The first Fresh & Easy Express market, at La Cienega Boulevard and 18th Street in Los Angeles, opened on November 2, 2011.

Tesco's Fresh & Easy plans to have seven of the small food and grocery markets, all located in Southern California, opened by the end of March 2012.

The next Fresh & Easy Express store set to open is the unit at Victory Boulevard and Buena Vista Street in Burbank, California. The store's opening date is set for one week from tomorrow, Wednesday, January 18. (You can see photographs of the Burbank Fresh & Easy Express store's construction in progress here.)

Tesco is hoping the new, 3,000 square-foot Fresh & Easy Express format stores will play a major role in its efforts to break-even with its Fresh & Easy Neighborhood Market chain in America, which is now four-plus years old and continues to lose a significant amount of money for the United Kingdom-based global retailer, which has operations in 14 countries and is the third-largest food, grocery and general merchandise retailer in the world.

The opening of the 'Express' store in Hermosa Beach tomorrow comes on the heels of an announcement Tesco's Fresh & Easy made late Monday (January 9, 2012) that it's closing 12 underperforming Fresh & Easy grocery markets, a story we broke on Sunday (see here) in Fresh & Easy Buzz, and followed up on Monday (see here), with a second story in which we listed the locations of the 12 stores the grocer is closing, along with reporting on the internal announcement about the store closings made to company employees by Tim Mason, CEO of Fresh & Easy and group deputy CEO of Tesco.

Mason made the announcement via an e-mail to selected employees of Fresh & Easy just a short time before we published our report on Monday. Following the publication of our story on Sunday and our follow up piece early Monday afternoon, in which we reported the stores to be closed, Fresh & Easy Neighborhood Market made the announcement of the store closures, although initial plans called for it to make the Wednesday.

One of the reasons Tesco CEO Philip Clarke and Mason are working hard to get the first seven Fresh & Easy Express stores opened before the end of March is because they hope the 3,000 square-foot grocery markets will perform well, and therefore help provide a key to breaking even financially with Fresh & Easy Neighborhood Market by the end of Tesco's 2012/13 fiscal year, which begins in February of this year and ends in February 2012. This is something Clarke, who took over as CEO of Tesco in March 2011, says will happen.

Tesco will report the results of its 2011/12 fiscal year, which ends in February, in April of this year. Tesco reported a half-fiscal year loss of $112 million for Fresh & Easy earlier this year, on sales of $470 million.

The loss is 23% less than Tesco reported for Fresh & Easy for the same period a year earlier but still remains substantial. As we reported Sunday, the closing of the 12 underperforming Fresh & Easy stores is part of Tesco's strategy to achieve break-even with the chain by the end of the 2012/13 fiscal year.

But tonight, on opening eve, all eyes are on the "Neon Fresh & Easy Express, the soon-to-be-opened store on a busy stretch of the Pacific Coast Highway in the the eclectic neighborhood in Hermosa Beach, California.

And come tomorrow, the new Fresh & Easy Express store with its bright neon sign will join Learned Lumber, Sassy's, The Tendor Box and numerous other retail stores in the eclectic coastal Hermosa Beach, California neighborhood, each one offering what it offers to the eclectic mix of residents who live there.

Welcome to the (eclectic) neighborhood, neon sign and all.

[Related Stories: Read our extensive coverage and analysis of Fresh & Easy Express, including our story that broke the news on the retailer's plans to launch the format, here.]

Monday, January 9, 2012

Yesterday we broke the news that Tesco will close up to 12 of its 184 Fresh & Easy Neighborhood Market grocery stores in California, Nevada and Arizona. [Read the story here - January 8, 2012: Tesco to Close Up to 12 Fresh & Easy Stores.]

The store closures were announced to employees of Fresh & Easy Neighborhood Market by CEO Tim Mason today.

In making the announcement Mason said this: " Like any retailer, we are always evaluating our store portfolio and we have decided to temporarily close twelve underperforming stores. At this time, there is simply not enough growth in sales and customers to keep these stores open. Many have been open for several years and are trading in areas where the network of Fresh & Easy stores will be able to absorb most of the existing customer base. We have taken significant steps to minimize the impact these temporary closures will have on you, including making sure we are able to offer all impacted employees a position at another nearby store."

As you can see in the paragraph above, Mason calls the store closures "temporary." He used that word because Fresh & Easy plans to "mothball" the 12 stores like it did with the 13 units it closed in November 2010. All 13 of those stores remain closed and are vacant.

Mason also told employees in today's announcement that although the retailer is closing the 12 stores, Fresh & Easy plans to "open more than two dozen through March, including seven new Fresh & Easy Express stores in Los Angeles and Orange counties and our first five stores in the Sacramento market."

The first batch of those two dozen-plus new stores are set to open on Wednesday.

Neither Tesco or its Fresh & Easy Neighborhood Market chain has publicly announced the closure of the 12 stores listed above.

Tesco has now closed 25 Fresh & Easy stores since it launched its El Segundo, California-based small-format fresh food and grocery chain in November 2007, when the first batch of stores were opened.

With the closing of the four Fresh & Easy units in Phoenix, Tesco will have just 24 stores in Arizona, down from a high of 34 units in October 2010, before the six stores were closed in November of that year.

There are currently 135 Fresh 7 Easy stores in California. Closing the seven stores will reduce the grocer's store count in the state to 128 units, but only until Wednesday when Fresh & Easy Neighborhood Market will begin opening the first batch of what will be a couple dozen new stores in California over the next few months. See our exclusive list of those stores here.

The closing of the single store in Las Vegas, at Ann and Decatur, will give Fresh & Easy Neighborhood Market 20 units in Nevada, down from the current 21 stores. The retailer plans to open a couple new stores in the metro Las Vegas region this year, so that store count number will rise once those units open.

Fresh & Easy Neighborhood Market didn't open any new stores in Arizona or Nevada in calendar year 2011, although it has a number of locations in both states it's been sitting on in both states for a considerable amount of time. Instead, all 29 of the new stores it opened in 2011 are in California, which is where all but a handful of the new stores set to be opened in 2012 will be located.

We'll be offering some analysis on the latest round of Fresh & Easy store closings in an upcoming piece. Stay tuned.

﻿﻿Tesco plans to close up to 12 underperforming Fresh & Easy stores as part of its strategy to break even financially with its fledgling Southern California-based fresh food and grocery chain by the end of its 2012/13 fiscal year, which begins in late February and runs through February 2013, Fresh & Easy Buzz has learned.

El Segundo, California-based Fresh & Easy Neighborhood Market could announce the latest round of store closures as early as Wednesday, January 11, according to our sources.

The store closure announcement could come as early as Wednesday because Tesco is opening a number of new Fresh & Easy stores, its first for the new year, on January 11. Timing the store closure announcement on the same day a number of new stores are being opened could serve to blunt some of the justifiably negative press that will come from the announcement, according to the thinking of some at Fresh & Easy Neighborhood Market, our sources tell us.

From a public relations perspective such spin could go something like this: 'Yes we are closing some stores but we also opened numerous new stores today,' followed by a comment or two on the continuing poor economy in the places where the stores are being closed, or something similar.

Fresh & Easy Buzz is the first publication to report this development. Neither Tesco or its Fresh & Easy chain have announced any plans to close any stores.

﻿Tesco closed 13 Fresh & Easy stores in November 2010 but didn't get around to "mothballing" some of the units until much later. Pictured above is the closed grocery market at 3232 East Guadalupe Road in Gilbert, Arizona. A Fresh & Easy Buzz correspondent took the photograph above on March 23, 2011, which is when the crew took down the signs and "mothballed" the store, which was closed five months earlier.﻿﻿ [Photo credit: Fresh & Easy Buzz.]

Tesco closed 13 underperforming Fresh & Easy grocery markets in November 2010 - six units each in Nevada and Arizona and one store in Southern California. Fresh & Easy's CEO, Tim Mason, said at the time the stores would be "mothballed," and possibly re-opened in the future. The grocer still holds the leases on the 13 closed stores. See here and here for details.﻿
﻿

Inside a "mothballed Fresh & Easy store: The unit at 858 South Greenfield Road in Gilbert, Arizona, which was closed along with 12 other stores in November 2010. [Photo credit: Fresh & Easy Buzz.]

If Tesco closes all 12 underperforming Fresh & Easy units currently under consideration, which our sources tell us is probable, that will make for 23 Fresh & Easy stores it's closed since launching the Southern California-based chain in November 2007.

Additionally, Tesco has held back from opening numerous Fresh & Easy locations, some of which has been sitting in various states of completion since 2008-2009. These includes store sites in Arizona, Nevada and California.

That Tesco will close more Fresh & Easy stores comes as no surprise to Fresh & Easy Buzz, since we said in the blog in 2011 that it is one of the things the United Kingdom-based retailer will have to do if it hopes to come close to breaking even with Fresh & Easy over the next 14 months.

This year is a crucial one for Tesco with Fresh & Easy because for all practical purposes it has until the end of December to get to break-even with Fresh & Easy Neighborhood Market because the month of January and partial month of February 2013, when the 2012/13 fiscal year ends, is insignificant. If it doesn't happen by Christmas 2012, it isn't going to happen at all because the month of January 2013 and a few weeks in February aren't enough to make a difference, in our analysis.

Because 2012 is a "make or break" year for Tesco with Fresh & Easy, expect to see other significant changes being made, in addition to the latest round of store closures.

On October 5, 2011 Tesco reported a fiscal half-year loss for Fresh & Easy of $112 million on sales of $470 million. The second-half fiscal year began at the end of August 2011 and runs until the end of February 2012. Tesco will report how much it lost on Fresh & Easy for its full fiscal 2011/12 year in April.

The half-year loss amount is 23% less than Tesco lost on Fresh & Easy in the same period the year before. However, there's no guarantee this trend will continue into the second half of the fiscal year.

Tesco plans to open numerous new Fresh & Easy stores this year. Opening new stores requires start up expenses and adds to labor costs. Sales from new stores lag behind paying for those start up and new labor costs, which makes breaking even with Fresh & Easy while opening numerous new stores an even more difficult task for Tesco.

Sunday, January 1, 2012

California's new law that prohibits shoppers from purchasing alcoholic beverages at self-service checkouts in retail stores went into effect today - but with a twist.

The twist is that at the request of the California Grocers Association (CGA), the California Third District Court of Appeals has halted the enforcement mechanism set forth by the California Alcohol Beverage Control Agency (ABC) in its December 23, 2011 advisory.

As we reported on Thursday, the trade association for food and grocery retailers in California filed a lawsuit before Christmas asking the state appeals court to halt an enforcement mechanism outlined by the California Alcohol Beverage Control Agency (ABC) in its December 23 advisory notice because the trade group says the agency's interpretation of the new law, AB 183, "is inconsistent with the statute, unenforceable, and in violation of the California Administrative Procedure Act (APA)."

The court says the halt of the ABC advisory will remain in place until there's a decision on the lawsuit filed by the CGA, which means for now retailers don't have to follow the guidelines set forth by the ABC in its December 23 advisory.

AB 183 however is law as of today, which means it's illegal in California for customers to purchase alcoholic beverages at self checkout registers in stores.

Confused? You should be.

What is unclear however is how the law will be enforced.

For example, Tesco's Fresh & Easy Neighborhood Market has self-service checkouts only in all of stores, including its 135 units in California. There are 184 Fresh & Easy stores. The other units are in Arizona (28 stores) and Nevada (21 stores).

Fresh & Easy calls its self-service system assisted checkout because store employees assist customers with the checkout process if asked.

Additionally, all purchases involving alcoholic beverage sales at the checkouts require assistance from an employee. Whenever a shopper scans an alcoholic beverage item during self-checkout the system locks up, which requires the assistance of a store worker in order for the transaction to be completed. The self-checkout systems at all other retail stores in California work essentially the same way.

As we written previously, based on the language of AB 183 prior to the advisory issued by the ABC last week, it's possible that Fresh & Easy could use its existing self-checkout system as long as any transaction involving alcohol purchases is completely monitored and conducted by a store employee.

The ABC's advisory says this isn't the case however - hence the lawsuit by the CGA.

At present, based on the court's halting of the ABC's enforcement mechanism outlined in the advisory, it appears Tesco's Fresh & Easy will be able to use its existing self-checkout system as long as any customer transaction involving the purchase of alcoholic beverages is monitored 100% by a store employee.

That, however, is our interpretation - and from what our sources tell us is the assumption Fresh & Easy (and the CGA) is operating on today, the first day in which the law takes effect but without the key enforcement mechanism which has been halted by the court pending resolution of the CGA's lawsuit.

Meanwhile, we've checked but there's no word from AB 183's author, San Francisco Assemblywoman Fiona Ma, who a couple weeks ago sent out a press release touting the piece of legislation she wrote, about the controversy surrounding the self-service checkout booze ban law.

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